Inflation dynamics and forecast: Frequency matters

Arbeitspapier

Policymakers and researchers see inflation characterized by cyclical fluctuations driven by changes in resource utilization and temporary shocks, around a trend influenced by inflation expectations. We study the in-sample inflation dynamics and forecast inflation out-of-sample by analyzing a New Keynesian Phillips Curve (NKPC) in the frequency domain. In-sample, while inflation expectations dominate medium-to-long-run cycles, energy prices dominate short cycles and business-to-medium cycles once expectations became anchored. While statistically significant, unemployment is not economically relevant for any cycle. Out-of-sample, forecasts from a low-frequency NKPC significantly outperform several benchmark models. The long-run component of unemployment is key for such remarkable forecasting performance.

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• ISBN: 978-952-323-378-2
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Research Discussion Papers ; No. 8/2021

Classification and Topics

• Classification: Wirtschaft ; Forecasting Models; Simulation Methods ; Price Level; Inflation; Deflation ; Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications
• Subject: inflation dynamics ; inflation forecast ; New Keynesian Phillips Curve ; frequency domain ; wavelets

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Martins, Manuel Mota Freitas ; Verona, Fabio
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/240348